Scottish nationalists want to repeat euro’s flaw

Commentary: Monetary union without political union is impossible

LONDON (MarketWatch) — There are times when one despairs of politicians. In the case of the Scottish nationalists who are preparing Scotland’s possible breakaway from Britain after the referendum on the subject in September 2015, the emotion that strikes home is not despair but utter stupefaction.

The centerpiece of a white paper published at end-November by the Scottish National Party (SNP), “A guide to an independent Scotland,” is the plan to maintain sterling
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and the role of the Bank of England even after the Scots have pulled out of the U.K.

The Bourbon kings of France are celebrated for having learned nothing and forgotten nothing from history. Alex Salmond, Scotland’s first minister and leader of the SNP, appears to have gone one step better. With respect to the continent’s tortured experience within economic and monetary union (EMU) since 1999, not only has he learned and forgotten nothing, but he also has drawn precisely the wrong conclusions. Read more on the SNP plan.

Unaccountably, Salmond has chosen to ignore the prime lesson of the euro
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— that you need political union to make monetary union work. With breathtaking chutzpah that you would expect to see more in a Mexican gaming den than in the birthplace of Adam Smith, Salmond believes his country can withdraw from political union with the rest of Britain — yet still carry on with monetary union with England as though nothing had happened.

A passage in the 667-page white paper says an independent Scotland would continue to use the pound under a formal currency union with the remaining U.K. Such an arrangement would allow free trade and closely integrated financial regulation. As lender of last resort, the Bank of England would be “accountable to both countries.”

That is certainly innovative. In fact, it demonstrates the kind of free-spirited thinking that would encourage a burglar to revisit a house he has recently robbed and ask the owner if he could remove the rest of the furniture.

Salmond says the Bank of England and sterling are “as much Scotland’s assets as London’s assets.” He doesn’t seem to have thought that this could change in the event that Scotland withdraws from the U.K. union. The “rest of Britain” government and people, drawing the appropriate conclusions from the EMU debacle, would likely refuse to endorse a currency union with a country over which they had no political control.

The glaring absence in the white paper of a “Plan B” for the probable rejection of the “monetary-union-without-political-union” plan has been advanced as one reason why the document is unlikely to change the present Scottish opinion poll majority in favor of maintaining the link with England.

After all, a large part of the 15-year-old EMU drama has stemmed from Europe’s decision to Europeanize money without a political union to steer the construction through the near-inevitable shocks that would result.

German Chancellor Helmut Kohl, prompted by the German Bundesbank, was well aware of the risks. On the eve of the Maastricht treaty in December 1991 that set down the path to EMU, Kohl said that monetary union without political union would be a “castle in the air.”

Showing a mix of recklessness, arrogance and naiveté (your guess about the exact proportions is as good as mine), European leaders started EMU without political union. They hoped to fill in the yawning gaps in the edifice as they went along.

After running into the brutal setback of a creditor strike against peripheral countries in 2010-11, EMU members have entered into a period of savage adjustment that is starting, on paper, to show results yet has been enormously wasteful in terms of human, financial and political capital.

As part of this process, and 15 years later than necessary, the euro bloc is being given greater state-like character, for example regarding mechanisms for supporting hard-up states and regions, policing economic and budgetary policy, and protecting or winding up banks that get into trouble.

One of the few positive aspects of the EMU experience is that it has given the world a series of real-life lessons that would normally be available only in textbooks or in a laboratory. There are other useful conclusions that could be drawn from the chronicle of English and Scottish monetary union.

The Bank of England was founded in 1694 partly at the behest of Scottish banker William Paterson, who was then responsible for the disastrous Darien scheme to establish a Scottish colony in Panama that ruined the Scottish state and ushered in union with England in 1707.

There’s plenty here for Salmond and his advisers to ponder. That they have chosen blithely to ignore these lessons is a matter of astonishment. This does not bode well for other policies on Salmond’s wish list.

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